How Bad Is a Consumer Proposal? The Truth About Your Financial Future

Many people ask about the downsides of a consumer proposal. The truth is, it's a solid debt relief option that helps thousands avoid bankruptcy every year. Consumer proposals let you pay less than your total debt through a payment plan for up to 5 years.

The effect on your credit score might worry you - proposals stick around on your credit report for three years after you're done, up to six years from when you started. Consumer proposals have a 99% acceptance rate, and many complete them successfully. They give you a clear path toward financial freedom. Some drawbacks exist, but the benefits of getting debt-free through a proposal make up for any short-term challenges.

Understanding Consumer Proposals

A consumer proposal is a legal process that a Licensed Insolvency Trustee (LIT) manages. This solution helps Canadians reduce their debt payments without going bankrupt.

Eligibility:

• Unsecured debts must be between $5,000 and $250,000

• A steady income is required to meet payment obligations

• You must reside in Canada or own property here

  
  

A consumer proposal is ideal if you:

• Want to protect your assets from bankruptcy

• Earn enough that bankruptcy would lead to surplus income payments

• Prefer repaying an affordable portion of your debt instead of filing for bankruptcy

• Do not qualify for traditional debt consolidation

Once accepted, interest on debts, collections, legal actions and wage garnishments stop.

Common Fears vs Reality

Canadians often worry about what might happen after filing a consumer proposal. The reality is quite different from what most people fear. Let's review the facts behind these concerns.

Asset Protection Truth

Consumer proposals offer one most important advantage - complete asset protection. You keep all your assets when you file a consumer proposal and all assets you may acquire afterwards. This includes your home, vehicles, and retirement savings. Your secured assets stay safe if you keep up with mortgage and car payments. The protection extends to registered savings plans, RESPs, and other investments throughout the process.

Employment Impact Myths

A consumer proposal cannot legally affect your employment despite being a common concern. The Bankruptcy and Insolvency Act clearly states that employers cannot dismiss, suspend, lay off, or discipline employees just because they filed a consumer proposal.

However, some professional associations require you to notify them if you were to file a consumer proposal or bankruptcy.

These professionals should take specific steps:

• Accountants must notify CPA Ontario within 15 days of filing

• Lawyers should report to the Law Society of Upper Canada

• Financial planners must inform the Financial Planning Standards Council within 15 days of filing

• Human resources professionals need to notify the HRPA Office of the Registrar

  
  

Travel Restrictions Facts

Filing a consumer proposal doesn't limit your freedom to travel outside Canada. You can travel anywhere for work, vacation, or family visits without asking for special permission. The consumer proposal won't affect your passport applications or renewals either.

Maximizing Your Proposal Success

Smart money management will significantly affect the success of your consumer proposal. A detailed understanding of payment options and secured debt management is vital to your journey toward financial recovery.

Payment Strategies

A consumer proposal gives you flexible payment arrangements. Your monthly payments stay interest-free throughout the proposal term. Most people reduce their total debt by 30-40%, and some even reach reductions up to 80%.

These payment approaches work well:

• Switch from monthly to bi-weekly payments to finish your proposal faster

• Increase payment amounts when your pay increases

• Put tax refunds or work bonuses toward lump-sum payments

• You might sell non-essential assets to speed up debt repayment

  
  

Make sure extra payments fit your budget. Paying off your proposal too quickly could strain your finances. Your best bet is to keep payments steady while building emergency savings.

Managing Secured Debts

Your consumer proposal strategy needs careful planning for secured debts. Mortgages and car loans stay separate from the proposal. To keep these assets, you must:

• Keep up regular payments on secured debts

• Stay in good standing with secured creditors

• Add these payments to your monthly budget planning

If your secured assets are too expensive to continue within your budget, you could return them as part of filing your consumer proposal. Any shortfall owing to the lender will be a claim in your consumer proposal.

Note that secured creditors keep their rights throughout the consumer proposal process. They can take back assets if payments stop, regardless of your proposal status. Take time to assess if keeping secured assets matches your money goals.

Conclusion

A consumer proposal requires commitment, but the benefits—debt reduction, legal protection, and asset retention—make it a practical choice for many Canadians. Completing a proposal allows you to rebuild credit, gain financial security, and develop lifelong money management skills.

A consumer proposal helps you do more than get out of debt. You will attend counselling sessions to assist with budgeting, spending habits and rebuilding your credit.

Book your free consultation with Litvack Group to learn how a consumer proposal can improve your financial stability and security.

FAQs

1. How does a consumer proposal affect your credit score?

A consumer proposal will negatively impact your credit score upon filing. It remains on your credit report for 3 years after completion. However, with responsible credit use, many people can start rebuilding their credit to a good rating within 1-2 years after completing their proposal.

2. Can you keep your assets when filing a consumer proposal?

Yes, you can keep your assets when filing a consumer proposal. Unlike bankruptcy, a consumer proposal allows you to retain ownership of your home, vehicle, and other assets as long as you continue making any associated payments.

3. Will filing a consumer proposal affect my employment?

Filing a consumer proposal should not directly impact your employment. It's illegal for employers to fire, suspend, or discriminate against employees solely for filing a consumer proposal. However, some professions may require you to report it to regulatory bodies.

4. How long does a consumer proposal last?

A consumer proposal can last up to 5 years. The exact duration depends on the terms negotiated with your creditors. Many people aim to pay off their proposal as quickly as possible to rebuild their credit sooner.

5. Can I get credit while in a consumer proposal?

While it may be more challenging, obtaining credit during a consumer proposal is possible. Many people have reported success in getting secured credit cards or small limit unsecured credit cards. Building credit responsibly during this time can help improve your financial situation post-proposal.

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